In Discussion Paper No. 1039, Research Fellow Dani Rodrik &nbspclaims that three questions lie at the core of the large and distinguished literature on the political economy of trade policy. First, why is international trade not free? Second, why are trade policies universally biased against (rather than in favour of) trade? Third, what are the determinants of the variation in protection levels across industries, countries, and institutional contexts? The author argues that these questions are handled only imperfectly by the existing literature. Current models treat trade policy as a redistributive tool, but do not explain why it emerges in political equilibrium in preference over more direct policy instruments. Furthermore, existing models do not generate a bias against trade, implying that pro-trade interventions are as likely as trade-restricting interventions. The greatest contribution of the political economy literature may lie in developing a better grasp of normative economic analysis, that is, in helping design policies, rules, and institutions.

A political economy model of trade policy must contain four elements. First, it must contain a description of individual preferences over the domain of policy choices available to policy-makers. Second, the model must contain a description of how these individual preferences are aggregated and channelled, through pressure groups into `political demands' for a particular policy. The third and fourth components of the model are concerned with the `supply side' of trade policy. Here, the model must first characterize policy-makers' preferences. To know how these preferences play out and eventually interact with the demands for trade policy, the model must then specify the institutional setting in which policy takes place.

What does the Political Economy Literature on Trade Policy (Not) Tell Us that We Ought to Know?
Dani Rodrik

Discussion Paper No. 1039, October 1994 (IT)